How is earnings per share (EPS) calculated?

Earnings per share (EPS) is a key financial metric that measures the profitability of a company on a per-share basis. It is calculated by dividing net income, which is the profit of the company after all expenses, taxes, and costs have been deducted, by the number of outstanding shares of common stock. This calculation provides investors with insight into the company's profitability relative to each share, allowing for comparisons between companies and the assessment of earnings growth over time.

Understanding EPS is essential for investors as it reflects the company's ability to generate profits for its shareholders. It can influence investment decisions and valuations, as higher EPS typically indicates better profitability and financial health. In the context of the choices provided, the accurate calculation of EPS centers on net income and the number of outstanding shares, making it the correct foundational approach to determining this important financial indicator.